Investing Basics

What Is Diversification?

Diversification is the practice of spreading money across different assets, industries, or regions so that the performance of any single holding has a smaller effect on the whole. The idea is that different assets do not all rise or fall at the same time, which can reduce overall volatility.

How It Works

When holdings are not perfectly correlated, losses in one can be partly offset by gains or smaller losses in another. The degree of diversification depends on how different the holdings actually behave, not just on how many there are.

What It Does Not Do

Diversification does not guarantee a profit or prevent losses, especially in broad market declines when many assets fall together.

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🔗 Related Terms

Asset Return on Investment (ROI) Capital Gain

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Last updated: September 27, 2026. This definition is for general educational purposes only. It is not financial, investment, tax, legal, or medical advice, and it does not recommend any product or course of action. For decisions about your own situation, consult a qualified professional.